A mixed-message study hit my inbox Friday morning…
If we take it at face value, we can resign ourselves to three years of poor stock market returns.
Or, if we think a bit more deeply about it… there’s an opportunity hidden within.
Let’s take a look at the data, from Apollo Global:
Each green pip on this scatter plot is a three-year annualized return of the S&P 500, based on a monthly forward price-to-earnings ratio reading.
The higher the pip, the higher the three-year annualized return after that specific month. And the further to the right the pip goes, the higher the was at that time.
What this chart shows us is that as expectations for the S&P 500’s value proposition goes down, so do returns from the benchmark, with a pretty clear trend in that direction.
It makes sense. As the stock markets gets increasingly more expensive, the odds grow that it will get less expensive – either by higher earnings or by lower share prices.
The next question, of course, is what’s the current S&P 500 forward P/E? This chart from MacroMicro shows us:
So, as of Oct. 1, the forward P/E for the S&P 500 was just over 22. Glancing back up at that first chart, we can see there’s only 7 instances where what came next was a positive return. There were almost four times as many times where the three-year annualized return was negative.
Sounds a little bit like the S&P 6000 target we laid out on Friday could be the market’s last hurrah. How’s that for a scary Halloween story?
He’s identified a rare stock market pattern, responsible for producing gains of 117%, 250%, and even 514% in extensive backtests.
He’s calling it a “Retirement Accelerator Window” – and thanks to a move the Federal Reserve just made, he believes the window has opened again for the fourth time in 35 years.
Click here to watch Jason’s new broadcast and get the name of his #1 pick to buy ASAP for the shot at a triple-digit gain.
Now, before you start running for the hills, take a deep breath and look at that second chart.
Yes, stocks are expensive right now… with couple asterisks.
These are forward P/E ratios. In other words, forecasts. Not hard levels. So we could see earnings grow higher than forecast in the next year and bring the ratio down to lower than what analysts expect.
Stocks were just above a 21 forward P/E ratio in mid-2015, and the three-year average return (not counting compounding) for stocks from the peak of 21.43 in July 2015 to July 2018 was more than 10% per year. This is a real-world example of the previous point.
As with any long-term historical study, there’s the caveat that the market of today is very different from the one of yesterday – especially considering the interest rate situation.
This is just for the S&P 500… and the market is much more than the S&P 500.
That last point may be the most important…
We’ve been saying for weeks in these pages that the best individual returns going forward are not likely to come from large-cap stocks.
With the advent of lower interest rates, the shackles are coming off small- and mid-cap companies that are more sensitive to high-rate environments. That means that the smart money flowing out of risk-free money markets at decades-high yields is going to seek returns in those asset classes.
In other words, it’s more evidence pointing to the Great Equalizer coined by my colleague and contributing TradeSmith Daily editor Lucas Downey. Mega-caps have sucked up all the capital in the last two years, and it’s time for the little guy to get a bigger piece of the action.
We have a plan in place for this, and we credit much of that plan to our own Jason Bodner’s ingenious investment strategy.
As Jason explained yesterday, it’s incredibly unlikely to find outlier returns in mega-cap stocks. The last two years we saw of that were an outlier that was a direct result of the higher-rate environment… and the AI buildout phase that may have already seen its peak.
Going forward, it won’t be about the world’s biggest semiconductor companies building data centers. It will be about the underdog startups that harness the power of AI to make a more efficient business if not entirely reinvent one.
The smart money knows this, and it’s already starting to move capital into those names.
In what’s starting to sound like an evergreen headline, the price of gold cruised above $2,700 for the first time and is changing hands at $2,715.62 at writing.
All those folks buying gold bars at Costco should be happy about their decision… and maybe Costco feels a little silly not just hanging onto the stuff.
There’s about a hundred reasons you can point to for gold going up, but we think the simplest one is a combination of :
Fears of late-October market volatility, as we ourselves have been warning about.
Despite general uncertainty about who will win the election, the more-or-less unanimous agreement that whoever gets into office will spend like there’s no tomorrow and leave the debt problem for future generations. Talk about an evergreen headline.
We can opine about why gold is going up all day. But the simpler and more profitable move is to simply own some. Yes, even when it trades at an all-time high.
Looking through the data, we can count 28 instances of an all-time high in gold going back the last 20 years. (Gold investors are a patient bunch, because they have to be.)
Relatively uncommon as it is, holding gold for a month after a new high boasts a 60.7% win rate and average return (wins and losses) of almost 1.9%.
Holding longer only raises the odds. Hold for two months and the win rate drops slightly to 60%, but your average return more than doubles to 4.2%.
Hold for six months and you’re looking at a win rate of nearly 73% and a return of over 8%.
Translation: if you don’t already own gold, you haven’t missed the boat. Get some and hold onto it.
Before we wrap, let’s check in with the latest Big Money buys…
As we do each week here in TradeSmith Daily, let’s look at the latest Quantum Edge Hotlist that Jason’s subscribers got first dibs on last week:
We’re seeing a lot of recurring winners in on the buy side. Arista Networks (ANET), Check Point (CHKP), Tradeweb Markets (TW) and Royal Caribbean (RCL) all continue to grace the top 10 with some new names popping up.
The bottom 5 is lousy with biotech and healthcare, with former genetic-editing favorite Intellia Therapeutics (NTLA) making another appearance.
As regular readers know, this list contains the top high-quality stocks with unusually large buy volume… and the lowest-quality stocks with unusually large sell volume. It’s a fantastic source of new ideas either for long-term investing or short-term trading.
Jason’s subscribers will get access to the latest rankings this afternoon, along with a portfolio and market update. (If you’re not a subscriber, go here to change that.)
The Great Equalizer trade of 2025…
Dedicated readers know we have our eyeballs glued to companies not in the S&P 500 for the next 12 months. They also know why.
